Price is one of the four key elements of your marketing mix. It’s an incredibly important one because it determines how you position your product or service, and also affects other elements of marketing, like product features, channels, distribution, promotion and more. So, knowing how to price products is crucial – if you don’t know how or don’t have a working strategy in place, it could be costing you a fortune without you even realizing it. How do you go about assessing whether or not you have a solid a price optimization strategy in place?
Assessing Your Pricing Strategy
Many shy away from a pricing strategy for the simple reason that it’s easy to screw it up. If you price too high, customers might be deterred and opt for a competitor. If you price too low, you might be undercutting yourself and running your business into the ground. You know (or seem to know) the pricing you have in place, and are afraid to change it. Because doing nothing is a strategy, here are some guidelines to help you assess whether your strategy is working for you.
Are you competitive?
One of the best places to start when it comes to pricing is looking at what your competitors are charging. Being mispriced by even $0.05 on a competitive product might put you behind 3 pages of Google results, reducing your traffic to 0. Worse, it may create the perception of being too expensive--when a smarter strategy would have been to lower prices on key products to seem priced competitively. Three questions to ask about your competition:
1. Which products am I cheaper? Which am I more expensive? If you know where you are priced differently, you can then see if it is making any difference in your sales. And make changes to see what happens: if you lower the price on a top product, does the new traffic and sales make up for lost margin? Should you go back to suppliers and get as good a deal as your competitor?
2. Have your conversion rate or views dropped on any products? Frequently a competitor lowering the price can dramatically affect your conversion rate or even traffic to a product, especially if it's more than about $20 (the point at which people start to shop around).
3. Did cart abandonment recently go up? Frequently carts are abandoned because lower prices are found elsewhere. If your competitors are keeping a closer eye on prices than you are, they may be stealing your buyers.
Prices are key to marketing: that marketing email you're sending this upcoming holiday will create a lot of demand. But if you're not priced right, you might just have spent all that time and money creating demand for your competitors. Having a clear sense of where you should be competitively priced and where you can afford to keep more margin without losing customers is key to success in today's marketplace.
Are Your Customers Happy?
When in doubt, turn to your customers for help. Online survey software like Survey Monkey and Qualtrics can help you gauge your price relationship with your customers. If you are vertically integrated, consulting firms who specialize in pricing can run conjoint analysis to determine the ideal mix of features and price for your products.
Before you do that, however, start with your own data. Here are some questions to help you gauge how your customers feel about your pricing:
1. Do you have a lot of repeat customers? Price can be a huge driver to frequency of visit and purchase. If customers don't come back regularly, unless you're in a category where that would be expected, you should dig in to know why.
2. What are your customers saying in online review sites about how your products are priced? Do the comments or ratings reflect complaints about price? Some complaints are normal, especially for hard-to-find items, but more than 2 or 3 per 100 and you need to learn more.
3. What are consumers saying in online review sites about how your competitors have priced products similar to your? Whether customers say they got a great bargain from you, or got ripped off has a huge impact in how you craft a strategy that will work.
Are You Moving Towards Your Long-Term Goals?
Don’t ever lose track of your overarching goals when it comes to pricing your products. Some companies are in it for the long-haul and can afford to undercut their prices in order to boost sales over time (think Uber and Lyft), while others want to give the impression that price is a constant over the centuries and keep demand high and supply is low (Louis Vuitton, Rolex). Three questions to ask at every strategic review:
1. Is my pricing strategy supporting my long term goals? If competition emerged or growth slowed, was it due to price?
2. Am I acquiring enough customers at a high enough lifetime value to support my business in the long run? The valet parking app Luxe priced parking in downtown San Francisco at $15 per day when a meter cost $20 and a garage cost $40, letting it acquire a huge number of customers (at a loss). There are less extreme examples–for you, are you achieving the goals you need to with growth of new customers?
3. Are my promotions or other pricing events hurting my profitability or my brand? A big sales spike at the beginning of a promotion indicates your customers are "strategic"–they've learned to wait for your promotions, which can be very bad because that means they're not buying at full price. Take a look at our in-depth guide to how to run a more effective promotional strategy, but the short version is that promotions can be very damaging to profitability if not done carefully.
Dangers of Not Having a Strategy
We spoke with one company (we won't name them for obvious reasons) which had grown at 16% for 20 years–an impressive run. Until last year, when they shrank 5%–losing more than $10 million in revenue–because they didn't have a pricing strategy.
In a world where competitors have teams of people watching your prices, whether you sell identical items (Amazon and Jet.com) or close substitutes (Abercrombie and American Eagle), you are likely losing if you haven't articulated some kind of strategy. Just winging it is a strategy.
Creating a pricing strategy isn’t an overnight project, but it doesn't have to be a 6-month project either. Your business may support one hire in pricing, or it may only support half a head in Marketing with help from the outside. Whatever you do, ask yourself what the data tells you, and whether your choice is driving you towards your long term goals.